Consumer Staples: 3 Winners From a Losing Sector

Who’s up for digging through the trash heap?

Bespoke Investment Group ran an article last week showing how oversold each of the 10 sectors that make up the S&P 500 were over the previous seven days. Yardeni Research also published a report illustrating the return of each of those sectors year-to-date through Nov. 15. On both occasions, the consumer staples sector lagged the overall market. It isn’t the worst performer — that award goes to the utilities sector — but it is near the bottom. Of the seven subsectors that make up the consumer staples sector, brewers and personal products fared especially poorly.

In the name of mean reversion, here are three companies to bet on from those two subsectors.

Tap Into TAP

My first pick is an easy one … but not for the reasons you might think. It turns out Molson Coors (NYSE:TAP) is the only brewer in the S&P 500; conveniently, it’s down 6.6% through Nov. 15, making it an attractive candidate for a snapback play. However, be prepared for more pain before any gains. In fact you might want to hold off buying until the NHL gets back to playing hockey … which might not happen until next October.

Hockey is Canada’s game, and last year the country accounted for 31% of Molson Coors’ $6.69 billion in revenue. Without hockey, it’s almost as if Canadians have no reason to drink beer. Molson Coors sales for the first four weeks of the fourth quarter –– which just happen coincide with what should have been the first month of the hockey schedule –– are down 9% over last year. Last year, Molson Coors along with its U.S. partner SABMiller (PINK:SBMRF), signed a seven-year, $375-million deal to be the official sponsor of the NHL. (That deal is not working out too well so far.)

So why should you buy?

Because it’s the only major brewer that you can own for less than book value — in fact, it’s trading at a multiple of book value not seen in a decade. In June it paid $3.4 billion for StarBev, one of Central Europe’s largest breweries. And given its debt-to-total-capital of just 36%, the company could easily afford another acquisition — craft-beer enthusiasts wouldn’t like it, but Boston Beer (NYSE:SAM) would make an ideal target. TAP has traded between $30 and $40 since 2009. Eventually it’s going to climb out of its rut; a splashy buy like Sam Adams would do the trick.

Avon Calling

Let’s move to the personal products industry. With a total of five such companies in the S&P 500 to choose from, it makes my job a little easier (but not much). My first pick is Avon Products (NYSE:AVP), whose new CEO has a pedigree for success — now it’s time for the execution. Sherilyn McCoy, who took the top spot in April after a stint at Johnson & Johnson (NYSE:JNJ), replaces longtime CEO Andrea Jung.

McCoy brings a lot of consumer products experience to the table, having successfully folded Pfizer’s (NYSE:PFE) consumer business into J&J. On Thursday, she appointed former Procter & Gamble (NYSE:PG) executive Patricia Perez-Ayala as Avon’s chief marketing officer. Perez-Ayala’s experience in some of Avon’s strongest markets will definitely come in handy. Seven months into the job and McCoy is making some strong moves — with the stock at a two-year low, now’s the time to get on the bus.

EL-evate Your Portfolio

Estee Lauder’s (NYSE:EL) stock has lost 11% of its value in the past month, 500 basis points worse than the S&P 500. I guess every stock has to cool it at some point. EL has achieved a positive total return in eight of the past 10 years, posting 15.2% annual returns compared to 6.2% for the index. It’s a rock star on the S&P 500, delivering consistent earnings — and yet the stock is moving backward.

CEO Fabrizio Freda announced Nov. 15 that the company was adding two additional group presidents to work alongside the existing executives. Freda’s strengthening his bench while creating greater competition for his eventual succession — it’s another smart move from one of America’s brightest minds.

Although Estee Lauder’s first-quarter revenues grew by only 3%, operating income was up 12% to $482 million on $2.5 billion in revenue. Skin Care, the company’s biggest segment representing 44% of its overall revenue, grew operating income 16% in Q1. Historically, operating margins have never been higher.

My take? Every time its stock approaches $50, investors should be buying. While Molson Coors and Avon both present intriguing long-term prospects, Estee Lauder is the star of this show.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

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